SoftBank to reduce Alibaba stake

SoftBank to reduce Alibaba stake

NEW YORK SoftBank Group Corp is poised to make a gain of $34.1 billion by reducing its stake in Alibaba Group Holding from 23.7 per cent to 14.6 per cent.

The Japanese conglomerate will not sell its shares directly in the market. It is used in a complex security called prepaid forward contracts, which is a derivative largely used by investors.

A prepaid forward contract is a type of derivative that allows an investor to hedge risks associated with an equity investment in a company.

The contract has a cap price and a floor that restricts exposure to that price range.

The investors can either pay financial institutions in cash or hand the physical shares to settle the contracts.

The investor is protected from the depreciation if the stock goes down in value below the floor. David Martinez, an associate at Clifford Chance, said the investor doesn't participate in the upside if the stock appreciates above the cap.

Gareth Old, a partner at Clifford Chance, said that prepaid forward contracts are widely used by investors who want to monetize positions without actually selling the stocks. Financial institutions use the floor price of the range and apply a discount rate to advance the money.

Prepaid forward contracts also offer some fiscal advantages, as investors only have to pay taxes on capital gains when the contract is settled.

Is there a SHARES?

The equity market conditions are challenging for a direct sale of the shares, so SoftBank decided to hand 242 million shares in Alibaba to financial institutions.

SoftBank said the physical settlement would remove concerns about future cash outflows, reduce costs related to those contracts and shore up its defenses against market downturns.

The Japanese conglomerate is poised to gain $34 billion from unrealized gains and physical settlement.

Bo Pei, senior equity research analyst at U.S. Tiger Securities, said they wanted to have cash. The technology sector is down 30 per cent -- 40 per cent. SoftBank has always been heavily invested in these areas, but now they need cash.